BullionStar News
Writers Torgny Persson, Koos Jansen
& Hong Kang See

Why does money inflate?

Monday the 8th of January 2018
People who live in developed nations have grown used to inflation of around 2% a year over the last few decades. Why do prices generally rise by that amount? What drives the purchasing power of money in these countries? Why can’t prices stay constant year-over-year rather than increasing?

To help answer some of these questions, let's go far back in time. We'll divide the last one thousand or so years into three monetary eras: the silver coin period, metal-backed notes, and fiat money. How would the nature of inflation have changed as you passed from one era into the next?
The medieval coin era

Silver coins were the chief medium of exchange in the first five or six centuries of the last millennium. Even though coins were composed of scarce metal, inflation was a fairly common occurrence in medieval times. Coins were not perfectly durable. They suffered from wear and tear, both from sweaty hands and as they came into contact with other coins while in a pocket or purse. Since the value of a medieval coin was ultimately determined by the amount of silver in it, the purchasing power of the coinage would naturally decline each year as it shed silver. So rising prices, or inflation, was inherent to medieval coin systems.

The wear and tear of the coinage would often be accompanied by deliberate attempts on the part of the public to remove silver from coins. This came in the form of clipping, in which people would cut small bits of silver from the coin's edge, and sweating, in which a bag of coins was shaken, the dislodged bits collecting at the bottom of the bag. Clipping and sweating were illegal and punishable by death during medieval times, but that didn't stop people from doing it.

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